Small businesses grapple with Section 301 tariff impacts

Date: Friday, March 29, 2019
Source: American Shipper

Section 301 tariffs on goods from China are hurting some U.S. businesses downstream in the industrial supply chain, after the U.S. started imposing the measures last summer to generate changes in China’s business practices.

After the tariffs were launched July 6, some customers “pushed back, so we ate” some of the increased costs, he said. The company has been unable to collect reimbursements for about 10 percent of costs added by the tariffs because of language in its contracts and customer pushback, Anderson said.

The company also is keeping tariffed items in inventory for longer than anticipated due to slowed sales, he said.

Metal Man Work Gear is one of several U.S. small businesses trying to remain competitive while suffering fallout from Section 301 tariffs on goods from China.

As the U.S. and China work toward a deal to resolve trade tensions, other tariff effects on small companies have included lower profits, scrapped plans to expand to larger facilities and lost customers, according to interviews with executives of impacted firms.

Citing unfair Chinese commercial practices including intellectual property theft and forced technology transfer, the Trump administration on July 6 launched a first round of Section 301 tariffs, assessed at a rate of 25 percent across $34 billion worth of goods from China in annual import value.

Thus far, the Office of the U.S. Trade Representative (USTR) has granted exclusions for goods across 10 different 10-digit Harmonized Tariff Schedule (HTS) subheadings and 54 product descriptions pertaining to that initial list, which comprises a total of 818 HTS subheadings.

The agency has not granted any exclusions from 25 percent tariffs across another $16 billion worth of goods in yearly import value, activated Aug. 23. Moreover, USTR has not established an exclusion process for a third list of tariffs, imposed Sept. 24, assessed at a rate of 10 percent across $200 billion worth of goods in annual import value.

USTR’s stated objectives for the Section 301 tariffs focus on changing China’s behavior, but President Donald Trump has consistently cited tariffs, in a more general sense, as a means to promote U.S. manufacturing.

While the precise correlation between tariffs and manufacturing jobs is uncertain, the U.S. manufacturing sector has added 466,000 jobs during the first full 25 months of Trump’s tenure, compared with 76,000 manufacturing jobs created in the preceding 25 months, according to Bureau of Labor Statistics data.

But some companies downstream in the industrial goods supply chain have suffered due to Section 301 tariffs, as some small firms have been forced to employ new strategies to stay afloat, such as investing more in sales operations and scrapping plans to expand to larger facilities.

Austin Davis, owner of Magnolia, Texas-based Warp Speed Web, which sells gearboxes for excavating equipment, said he expects some of his company’s biggest customers to start buying directly from Japan after the firm adjusted its pricing amid the tariffs.

The four-person company had expected to import $200,000 worth of hydraulic power engines per month during 2019’s busier months, but now that’s “kind of up in the air,” considering the current business environment, Davis said.

USTR denied a request by Warp Speed Web for exclusion from tariffs on HTS 8412.29.8045 (hydraulic power engines, unlimited rotary acting, axial piston type), which is on the $34 billion list.

The company imported 1,900 units of the product in 2017, combining for a total value of $1.5 million, according to the firm’s exclusion request.

In a July 11 Federal Register notice setting forth the exclusion request process for the first round of tariffs, USTR said it would evaluate requests on a case-by-case basis, taking into account factors including availability of a product outside China, whether duties on a particular product would cause severe economic harm and whether the product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.

USTR did not reply to American Shipper questions about the Section 301 exclusion process.

Hydraulic motors similar to the ones that Warp Speed Web imports from China can be bought in other countries like South Korea and Japan, but it could take as long as a year for the company to find a new, non-Chinese operation capable of manufacturing to the firm’s proprietary specifications, a transition that would require redevelopment of molds needed to produce the engines, Davis said.

“When you have a proprietary version, you know, what are my options — to not be proprietary anymore?” Davis said. “To sell what everybody else sells? Or go to another country and start all over again? It took me four years to find the right manufacturers in China that had the material and the machine and the know-how to do what we wanted them to do.”

Warp Speed Web’s revenue is growing, but profit has decreased “quite a bit” since imposition of the tariffs, Davis said.

In some cases, Lenexa, Kan.-based Meico Lamp Parts Co. has been able to pass some or all tariff costs to customers, “but other times we just have to eat it,” said Van Elliott, a senior administrator for the company.

USTR denied two Meico exclusion requests for products classified under HTS 8544.49.3080 (insulated electric conductors of copper, for a voltage not exceeding 600 volts), a code on the $34 billion list.

Meico imported 10,717 units of that product in 2017, combining for a total value of $95,131, according to one of the company’s exclusion requests.

 

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